Report analyzes carbon footprint of U.S. mutual funds

A report that ranks funds by their carbon footprints may make it easier for advisers to determine which funds are greener than others — but whether it will help green investing become more mainstream remains to be seen.
APR 09, 2009
A report that ranks funds by their carbon footprints may make it easier for advisers to determine which funds are greener than others — but whether it will help green investing become more mainstream remains to be seen. The report examines the carbon footprints of the holdings of 91 of the largest U.S. mutual funds. “We looked at direct emissions and indirect emissions, which would include the emissions generated by the production of goods and services purchased by the company,” said Cary Krosinsky, vice president of Trucost PLC, the London environmental research firm that conducted the analysis and produced the report. Trucost analyzed funds using research into carbon emissions already collected from some 4,500 publicly traded companies worldwide. Emissions of carbon dioxide and other so-called “greenhouse gases” are believed to contribute to climate change and global warming. The report’s rankings may help advisers choose green funds and avoid heavy pollutors. “The report is telling you which mutual funds are at risk, once cap-and-trade starts, and this is very useful information,” said Judith Seid, owner of Blue Summit Financial Group Inc. of La Mesa, Calif., which has $60 million in assets under management. A cap-and-trade scheme would set mandated limits on carbon dioxide emissions and establish trading mechanisms so companies could buy and sell allowances, which are intangible credits allotted to companies that produce carbon dioxide as a byproduct of their operation. With a trading system in place, companies that produce significant emissions could buy allowances from others that didn’t use all of their allowance. The assumption is that overall emissions would be lowered. “Climate change is part of the risk analysis. This report is basically going to solidify what we have always believed conceptually, which is that companies that are less environmentally aware have greater risk,” said Ms. Seid. Still, some observers question whether the sector will take off as an investment strategy just because of the support green practices have received from the Obama administration. “Are we going to create a cottage industry around the Obama budget?” asked Geoff Bobroff, an East Greenwich, R.I.-based mutual fund consultant. “Do managers need to be prepared for that? Some of these ideas may have real validity. But with some of them we’re not going to see much in terms of real value.” Others say that climate change is a corporate risk factor and should be part of mainstream investing. “Some industry sectors have both valuation and profit risk,” Mr. Krosinsky said. “I think it’s likely we’ll see a [national] cap-and-trade program here in the United States.” The largest market for carbon trading is in the European Union, which established a mandatory emissions trading program in 2005. In the fall of 2008, a coalition of 10 states in the Northeast United States launched a regional cap-and-trade program. The issue of global warming may become secondary to cost considerations. “Regardless of whether you think climate change is real, the price on carbon is real,” Mr. Krosinsky said. “Once there is a price, that’s just another factor to consider in the price of a company. It’s a mainstream issue and it’s just a question of when that is recognized.” At least one adviser agrees. “If you talk about anything long enough, the business impact becomes real even if it’s not real in the climate,” said Joe Clark, founder of Financial Enhancement Group LLC of Anderson, Ind., which has $180 million in assets under management. “Any time government can spur regulation in a new way, it can [influence] where the dollars are going to go. We know this is real because they are going to make regulations and businesses are going to have to comply.” Still, Mr. Clark would not choose a fund solely based on its carbon footprint or lack thereof. “I wouldn’t necessarily buy a company [stock] because its carbon footprint was low,” he said. “But comparing two companies that are equal and one has a lower carbon footprint than the other, it may make it easier to take the benefit of the doubt and take the cleaner of the two.”

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